5 Best 401k Mutual Funds for 2014

One thing is clear in the workforce today — having a roster of the best 401k mutual funds you can find is more important than ever.

[1]Corporate pensions continue to disappear as plans run into financial problems or simply are not offered today. Thus, workers have to be even more committed to crafting a winning strategy when it comes to funding their golden years. Maximizing the success of the 401k is a big piece of this puzzle.

Fidelity Investments — the nation’s largest 401k provider — revealed in November that the average balance hit an all-time high of $84,300 at the end of the third quarter. For investors that are “pre-retirees” age 55 or older, balances hit the high-water mark of $255,000 at the end of 2013′s first quarter.

Those figures certainly were helped along by a robust market this year. But if you’re looking for factors that are actually in your control, you need to start early, and you also must make the best of your available choices if you want to retire happily.

Here are five of the best 401k mutual funds that are available in many plans:

Best Mutual Fund #1: Fidelity Contrafund (FCNTX)

[2]Fidelity Contrafund (FCNTX[3]) remains one of the best mutual funds you can own despite the growing asset base of the $73 billion fund.

William Danoff has managed this large-cap offering since 1990 and continues to master the art of growth investing. Danoff is not a momentum-driven stock picker; instead, he buys growth names that trade at reasonable prices and has a feel for uncovering solid businesses at the right price.

FCNTX has been defying critics for years who felt the large base of assets made the fund impossible to manage successfully. The fund owns more than 300 stocks, and turnover is 48% over the past year. Still, long-term investors have been rewarded over time as this fund is up 10.1% annualized over the past decade, which places it in the top 5% of its Morningstar category.

Best Mutual Fund #2: Fidelity Low-Priced Stock (FLPSX)

[9]Specializing in stocks that sell for under $35 per share leads Fidelity Low-Priced Stock (FLPSX[10]) to many midcap and small-cap names. This mid-blend fund has benefited from the steady direction of long-time manager Joel Tillinghast, who has the fund up 31% YTD.

This also is a story of size. FLPSX has a very large asset base of more than $30 billion, and it also holds a large number of stocks — currently more than 800 holdings make up the portfolio. Yet turnover remains modest at just 11% annually.

Domestic stocks make up the bulk of the portfolio, but there is foreign exposure here as well, with 14% of the fund in Europe, 6% in Japan and 5% invested in Canadian firms. Current top holdings include: UnitedHealth Group (UNH[11]), Microsoft (MSFT[12]), Best Buy (BBY[13]), Ross Stores (ROST[14]) and Bed Bath & Beyond (BBBY[15]).

FLPSX has gained an annualized 10.7% more than the last 10 years, good enough to land it in the top 7% of its Morningstar category over the long haul — certainly good enough to be considered among the best mutual funds for a 401k.

Fund expenses run a modest 0.8%.

Best Mutual Fund #3: T. Rowe Price Mid-Cap Growth (RPMGX)

[16]T. Rowe Price Mid-Cap Growth (RPMGX[17]) remains a fine option for investors seeking out growth in medium-sized companies. Manager Brian Berghuis has been in charge of this fund since its 1992 inception, with an excellent track record that has attracted $22 billion in assets for this midcap gem.

Stocks in medium-sized firms are simply not followed by Wall Street with the same intensity as many large-cap names. This provides a fine opportunity for gifted stock pickers to achieve superior results.

Berghuis has long shown his gift in RPMGX — the mutual fund is up 32% YTD and has appreciated an annualized 11.2% over the past decade, placing it in the top 7% of its Morningstar peer group. While growing asset size does raise concerns, it has not hurt fund performance to date. However, RPMGX has moved into some large-cap issues; 12% of the fund is in large company names.

RPMGX is now closed to new retail investors but remains a popular option in many 401k plans. Expenses are 0.8% annually with turnover a modest 30% over the past year.

Best Mutual Fund #4: T. Rowe Price New Horizons (PRNHX)

[23]When it comes to small-cap investing, T. Rowe Price New Horizons (PRNHX[24]) is having a banner year with robust 43% YTD gains.

PRNHX is an excellent way for investors to share in the growth of many small, dynamic companies — with a primarily domestic stock flavor. Recent top holdings include Advisory Board (ABCO[25]), Factset Research Systems (FDS[26]), Gartner (IT[27]), Harman International Industries (HAR[28]) and Lumber Liquidators (LL[29]).

This fund has a rich and successful history — it was started in all the way back in 1960 by Thomas Rowe Price Jr. Meanwhile, it boasts annual gains of 12.2% in the past decade, landing it in the top 2% of its Morningstar category. Manager Henry Ellenbogen has been on this assignment since 2010, keeping up PRNHX’s trend of fine performance continues.

PRNHX has attracted substantial assets and will close to new retail investors at the end of December. It has been closed to investors buying the fund through brokerage platforms for some time. Still, this is among the best 401k mutual funds available, so if your plan offers it, you are in good hands.

New Horizons charges a reasonable 0.8%.

Best Mutual Fund #5: Vanguard 500 Index Fund (VFINX)

VFINX, which is a popular offering in a number of 401k plans, provides exposure to the S&P 500 at a bargain basement price. The original index fund tracks the 500 largest companies — which account for about 75% of the total value of the stock market. And the Investor-class shares do so for a rock-bottom cost of 0.17% in expenses.

This fund can be viewed as a portfolio building block that provides broad-based exposure to a variety of sectors. Reflecting the current makeup of the S&P 500, 18% of VFINX is in the information technology sector, and 16% is in financial names. Current top holdings include Apple, Exxon Mobil (XOM[32]), Google, Microsoft and General Electric (GE[33]).

VFINX is up 28% YTD and has grown at an annualized 7.4% over the past decade. This performance lands it in the top 33% of its Morningstar large blend category.

While I am a big proponent of the right active management in mutual funds, this passive Vanguard offering’s combination of performance and dirt-cheap cost puts it among the best mutual funds you can find.

Read More: 2 Great Dividend Stocks for Retirement[34]

Bill Wysor is the editor of The Relevant Investor[35]. As of this writing, he was long FLPSX.

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